Tuesday, July 23, 2013

Stock Bought: KMI

Today I bought shares of Kinder Morgan, Inc. (KMI), the third-largest energy company in North America and operator of an extensive network of pipelines for transporting natural gas, crude oil, and petroleum products. I made previous purchases of KMI in October 2012 and March 2013.

I consider KMI to be fairly valued at the current price, making it a decent purchase in the context of a broader stock market that is near an all-time high. Using a Dividend Discount Model with a dividend growth rate of 10% (which is the company's long-term target) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $43.07. Morningstar gives a fair value of $41.00 and a 3-star rating. The average of those two estimates is $42.03, which implies a 7% margin of safety at my purchase price. In general, I think KMI is a decent purchase whenever it yields over 4%.

I bought 40 shares of KMI at the price of $39.15 per share plus commission, giving me a 4.07% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $16.00 from this purchase, which will add a total of $64.00 to my annual dividend income. The stock goes ex-dividend next week, so these shares will pay their first dividends to me in mid-August. This purchase was made in my taxable account by combining $700 in new capital with $900 in dividends that had accumulated over the last few months. Given that I already owned 40 shares in my taxable account and 50 shares in my Roth IRA, I now have 130 shares of KMI and I will receive combined quarterly dividends of $52.00. My forward 12-month dividend total increases to $2,503.

After a few months of inactivity it was nice to finally make a purchase. I would have preferred to buy a deeply undervalued stock, but good deals are hard to come by in the market these days. KMI seemed to be one of the better opportunities available, so I deemed it worthwhile to increase my position. It is now the second-largest holding in my portfolio, with a weight of 5.8%. My next stock purchase will depend on when I receive my moving expense reimbursement and associated supplement; the paperwork has been submitted but I was told it would probably take 2-3 weeks to process. Thus, I will likely have new capital for investment by mid-August.

DM: Thanks for your comment. Given that KMI is now my second-largest holding, I am comfortable with its weighting in my portfolio, too. However, I would consider making an additional purchase if the price were to fall below my overall cost basis (~ $37).

Good call on KMI, I've been looking at it for a while and recently picked some up. Was thinking about grabbing more on the dip but went with Nestle instead (trying to diversify the portfolio a bit more). I agree that deeply undervalued stocks are few and far between right now (especially for dividend investors) and KMI is one of the few worth picking up. Doesnt hurt that it goes ex-dividend soon either.

BADiv: Thanks for your feedback. I think KMI is a well-run, shareholder-friendly company, so it was a relatively easy decision to buy more shares, especially given the limited opportunities out there.

I have looked at Nestle from time to time and wouldn't mind owning it, except the valuation has tended to keep me away. Of course, one could say that about plenty of stocks nowadays. It would be nice if Nestle went "on sale" at some point in the future.

Nice choice with KMI. I started a KMI position last October as well, the dividend growth has really been a treat. No complaints from me :) The Kinder Morgan conference call is one of my favorites. I always enjoy listening to what Rich has to say.

Not sure if I'm going to make a purchase this month, we'll see what happens next week.

Nestle is a tough one, especially given that it's traded on the pink sheets, different currency, and only pays dividends once a year (although since it is in my retirement portfolio, not a deal-breaker for me). Joshua Kennon (www.joshuakennon.com) has a pretty good analysis of the stock; may be worth checking into.

BADiv: I own Swiss-based Novartis that pays annual dividends and UK-based Vodafone that pays semi-annual dividends, so I don't mind getting non-quarterly dividends tied to foreign currencies. I don't own any pink-sheet stocks, but Nestle is one of the few exceptions that I would be okay with owning in that category.

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